In a recent circular, Value Starting to Emerge, Morgan Stanley Research said most commodities (except thermal coal and lithium) are pricing-in a considerable demand slowdown, but the apparent weakening in actual demand is not yet visible in inventories. A potential recession in Europe puts non-energy metals under further pressure, with resulting demand concerns outweighing the supply-side impact for now.

Morgan Stanley’s China economist believes a gradual exit from Covid-zero and coordinated intervention in the property sector could result in improving demand by Spring. However, Morgan Stanley’s commodities team still sees some more downside to prices before green shoots emerge.

Aluminum sits on top of the team’s order of preference, with significant demand cutbacks now priced in, while energy-driven smelter cuts should drive price upside by Q4 2022. Iron ore is the second top pick, but this is more tactical on an H1 2023 horizon, as China’s steel output recovers and supply is typically seasonally constrained. Copper market will face surplus in 2023-2024, mostly driven by supply growth, prices are expected to bottom by H2 2023.

Nickel is put under further pressure by rapidly expanding Indonesian supply. The group said it prefers the platinum group metals (PGMs) over gold, as gold looks overvalued against a backdrop of rising real yields, but they see support for PGMs from an increasingly tighter market.

Morgan Stanley Research also published their annual review of incentive prices and they raised long-term prices by 10%-25% for key commodities. The upward revision is mostly driven by the impact of cost inflation on project economics. Most projects are still in the money at current prices, but miners remain cautious on making actual investment decisions.

On the negative side, Morgan Stanley Research’s base case forecasts don’t factor in a full global recession, and such a scenario would result in more severe demand cutbacks — likely reducing commodity prices below the base case. On the positive side, an inflection in China’s property markets and stronger GDP growth in the country due to continued infrastructure stimulus may push prices above the base case.